- Low barrier to entry
- Easy to learn as you go along
- Most decisions are common sense (e.g. a tenant doesn’t pay -> evict; repairs needed -> perform repairs; vacancy -> advertise, etc.)
- Allows you to leverage other people’s time (e.g. property managers, lawyers, accountants, real estate agents, etc.) & money (the bank, private lenders, etc.)
But before you consider investing in real estate it is vital that you invest some time to learn the basics.
Find some hands-on courses (go to your local real estate investors’ monthly meeting and ask for recommendations) and read some real estate investing books (check Amazon and pick up the ones that consistently get 5-star ratings). Why? Because if you buy a real estate property that doesn’t follow a set of fundamental rules then it doesn’t matter what you do, you’re going to lose money. What are the rules that I recommend for beginner real estate investors?
- Properties must be cashflow positive/neutral. What this means is that after paying off the property taxes, insurance, snow removal, grass maintenance, property management, bookkeeping, accounting, mortgage and then accounting for vacancy and repair allowances you still at the least break even.
- Properties must be mid/higher end, this will avoid most “trouble tenants”
- Properties must be in a desirable neighborhood (e.g. near a convenient bus route is the most important; but also near a convenience store, coffee shop and a few restaurants preferably)
- Properties must be in or beside cities with population growth trends and job growth trends
These fundamentals are key to real estate investing success. Once you choose the right properties it’s vital that you follow a set of unemotional rules for your tenants as well:
- Before renting to any tenant perform both a financial & criminal background check. Set your own rules but we don’t ever accept a tenant that doesn’t have decent credit and/or a criminal background. We use these guys: https://www.tenantverification.com/
- Prior to giving access to the unit photos are taken and shown to the tenant, tenant initials each photo and signs agreement that this is the condition they received the unit in and that they are responsible for damages
- All tenants sign an agreement which identifies the # of keys given and that if they lose a key they will be charged $x for replacing the locks and new keys
- All units are equipped with fire extinguishers and new smoke detector batteries; tenants sign forms signifying this was done and that they will maintain the battery in the smoke detector
- Rents not received by the 4th of each month are given a written warning (even if they say they’ll pay on the 5th)
- Rents not received by the 21st of each month are informed via registered mail that you are starting the eviction process (even if they say they’ll pay on the 22nd)
- Quarterly inspections are performed; regularly and no matter what
- Complaints are handled expeditiously and with police intervention with a police report if required (note: this happens very rarely; take it seriously when it does)
- Repairs are done expeditiously and professionally if it impacts the tenants (toilet issues, water leak, frozen pipes, etc.). This is vital both for maintaining your tenants respect and for enforcing evictions should the need arise.
You must set the tone with your tenants that you are a serious landlord and that you care about them. Over the last 4 years I’ve acquired dozens of units and I’ve only had two problems to date, there is a reason for this and it’s because of an unemotional systematic approach to real estate investing.
By leveraging other people’s money (the banks) you gain appreciation on the value of the full asset when only investing a fraction of the money (e.g. $45,000 down to buy a $300,000 building which will likely appreciate at a pace of 3-5% per year on average). Also while your real estate appreciates your tenants are paying down your mortgage at a rate of 3-6% per year depending upon the mortgage terms. The cherry on top is that, as long as you’ve followed the rules outlined above, you’ll reap the rewards of earning positive cashflow each and every month which you can save up for unexpected expenses outside of your repair and vacancy contingency budgets. Oh and finally you also gain tax benefits in the form of being able to depreciate your investment real estate to offset capital gains (talk to your accountant to learn more about offsetting capital gains).
These four benefits have helped me systematically earn a return on investment (ROI) on each of my properties at a rate of 25-45% per year with very little risk and virtually no stress. The key to minimizing the risk while eliminating the stress are following the fundamentals. When you have a set of baseline rules that you can unemotionally follow, it can create some pretty amazing results!